China recently released their PMI which fell from a 5-year high (see Chart 3). Manufacturing PMI came in at Oct Manufacturing PMI at 51.6 (vs 52 expected), and Non Manufacturing PMI at 54.3 (vs 55.4 expected). For weeks now we have been seeing signs of a slowdown in various macro indicators but they have been ignored by the market and its momentum chasing traders.
Charts 4 and 5 show how broader Chinese economic indicators are pointing to a slowdown from the excess seen earlier this year. Chart 4 tracks China Macro Surprise Index plotted against China Credit Impulse on a 12-month lead. The credit impulse has been showing signs of a slowdown which we are yet to see in actual economic numbers out of China. Chart 5 shows the China Monetary Conditions Index plotted against the China Macro Index and its PMI (source Citigroup).
Now that the National Congress is over, there could be a bigger focus to pursue those economic reforms curbing in speculation and excess leverage. With property sales cooling, and officials continuing their efforts to rein in financial risks, could we start to see some pullback in the global coordinated growth theory? After all, they did save the world back in January 2016, unleashing a burst of unprecedented and coordinated
Chart 5: China Monetary Conditions vs. Citi Macro Data Index vs. China PMI
growth which only cost them some $8 trillion in debt. (What’s another trillion on a Net Debt to GDP in excess of 250%?).
One thing is clear, there will be a lot more volatility going forward. Chinese government bond yields have been rising and now are in excess of 3.9%. Bear in mind a lot of wealth management products are linked to the belly of the Chinese government bond curve, which could cause for some unravelling if yields move higher too quickly. And everyone and their mom is now short volatility products via being long the $XIV (inverse volatility ETF) as they are convinced volatility can only fall as it has been. I am not against that notion but, when retail investors desperately chase any momentum driven gains without understanding its implication and how severely it can go wrong in one day, it can be a problem when they all rush for the exit.
35 | ADMISI - The Ghost In The Machine | November/December 2017
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